WHICH ECONOMIC POLICY FOR THE FIFTH LONG …growth-distribution.ec.unipi.it/fullT/Re-Top-Convegno1.doc · Web viewAN ECONOMIC POLICY FOR THE FIFTH LONG-WAVE. Drawing the implications

Conference on “Economic Growth and Distribution” – Lucca 16-18 June 2004

AN ECONOMIC POLICY FOR THE FIFTH LONG-WAVE. Drawing the implications of some recent contributions on long-term growth

Angelo Reati*

Research Unit on Complexity in Economics, ISEG-UTL, Technical University of Lisbon

Jan ToporowskiWolfson College, University of Cambridge

Summary

The paper starts by reviewing some recent contributions on long-waves, in order to recall the essential points of a theory that, better than any other, is able to explain the long term development of capitalist economies. Considering that the present technological revolution in ICT is part of the broad phenomenon of a new long wave, it follows that the main focus of economic policy should be to support the diffusion of the new technological style and to favour the institutional changes required by such an objective.

On the basis of a selective view of what is deemed crucial to foster the full implementation of the new long wave, four broad guidelines are suggested: (i) a Keynesian policy for demand that emphasises the necessity to revise the straitjacket of the Maastricht criteria as well as to improve the income distribution in favour of employees; (ii) a policy to re-establish the primacy of productive capital through systematic concerted open market operations to regulate liquidity in the financial markets; (iii) a reconstruction of the employment relationship that, while taking into consideration the requirements of the new technological paradigm, preserves the essential features of the “European social model”; a targeted flexibility of labour, that contrasts with the all-out market flexibility that results from the neoclassical theory, is also suggested; (iv) a regime for intellectual property rights that avoids the drawbacks – both ethical and economic – of current US practices.

Table of contents

I. THE LONG WAVES IN ECONOMIC DEVELOPMENT

1. The Classical roots of the long-wave theory2. The debate3. The unifying characteristics of long-waves4. Technological revolution and finance capital 5. Further details on the four phases of the long-wave

II. AN ECONOMIC POLICY FOR THE FIFTH LONG-WAVE. A EUROPEAN VIEW

(II.1) An appropriate theoretical reference

1. The long wave theory offers a valid guidance for economic policy

* Corresponding author. Address: av. Emile de Beco 55 – 1050 Bruxelles (Belgium). E mail [email protected]

2. The inadequacy of the neoclassical theory

(II.2) Suggested directions - selected issues

(a) The case for a Keynesian policy of demand1. Theoretical considerations2. How to boost aggregate demand 2.1. Public investment 2.2. Private consumption

(b) Re-establishing the primacy of productive capital1. The problem2. Speculative versus accommodating finance3. The precondition for accommodating finance4. Open market operations to regulate liquidity5. Discussion

(c) The employment relationship1. Preliminary remark: the new configuration of the employment relationship as the result of social conflicts2. Characteristics of the Fordist employment relationship ... 3. ..... and its flaking off4. Some proposals for reconstruction: the Supiot report

(d) A targeted flexibility of labour1. Growth-enhancing flexibility2. Labour-controlling flexibility

(e) A new regime for intellectual property rights1. Transfer of knowledge, innovations and patents2. The developments in the U.S.: problems and concerns3. The sustainability of the American system4. Suggestions for a European policy on intellectual property rights

III. CONCLUSIONS

1. The appropriate theoretical reference2. The main focus of economic policy3. A Keynesian policy for demand4. Definanciarising the economy5. Reconstruction of the employment relationship6. A regime of intellectual property rights for the new long-wave

Figure 1: The life cycle of a technological revolutionFigure 2: Recurring phases of each great surge in the core countriesFigure 3: The rate of profit – total economy

Table 1: Condensed summary of the Kondratiev waves

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AN ECONOMIC POLICY FOR THE FIFTH LONG WAVE. Drawing the implications of some recent contributions on long-term growth

Angelo Reati*

Research Unit on Complexity in Economics, ISEG-UTL, Technical University of LisbonJan Toporowski

Wolfson College, University of Cambridge

In the first part of this paper we shall recall the main features of the long-waves theory, a theory that, at the present stage of development of economic thought, is in our view the most valuable to understand the present situation and, consequently, offers the best guidance for economic policy. In the second part we shall outline some possible policy implications that can be derived from such an approach.

I. THE LONG WAVES IN ECONOMIC DEVELOPMENT

A growing number of economic historians agree that long-term economic development of capitalist economies is an uneven phenomenon: periods of sustained growth of output and trade of about 25 to 30 years are followed by periods of slow or stagnating growth of analogous duration. Similar movements also appear in prices and other monetary variables. Of course, each historical period is unique but, in spite of these peculiarities, “there is a certain sequence of events that recurs about every half century” (Perez 2002, p. xvii) – i.e. technological revolutions, financial bubbles, collapses, golden ages, political unrests. This opens the possibility to construct a theory that explains the causes and mechanisms of the common characteristics of each long-term movement, and that also offers guidance for economic policy.

1. The Classical roots of the long-wave theory

Growth – and its uneven unfolding – was one of the main concerns of classical economists (Smith, Ricardo, Malthus, Marx), but the long-term oscillatory pattern of prices and output also attracted the attention of some of the founders of Marginalism, such as W.S. Jevons (who in 1884 analysed the long-term fluctuations in prices) and J.B. Clark. They were joined by other exponents of the marginalist school (particularly, in 1913, Pareto, Bresciani Turroni, Aftalion) so that, at the beginning of the 20th century, there was a consensus among economists on the reality of what was later called the long-wave.

However, the gradual ascendancy of the neoclassical theory – culminating with the * Corresponding author. Address: av. Emile de Beco 55 – 1050 Bruxelles (Belgium). E mail [email protected] thank G. Carone, E. Fontela, E. Screpanti and A. Tylecote for commenting on a previous draft. We are also grateful to U. Muldur, C. Perrez, P. Petit and R. Petrella for helpful discussions. Of course none of them is responsible for the opinions expressed here and for possible errors.

model of general equilibrium – diverted attention from growth and its irregularities and, when the theory of growth returned to the forefront of interest in the 1950s, the focus was on conditions for regular growth (the "steady state"). The business cycle was not ignored, but it was treated within the conceptual framework of equilibrium, on the basis of the "rocking horse" metaphor. According to this metaphor, the economic system tends spontaneously to equilibrium. Cycles are exogenous perturbations produced by random shocks (impulse generation), which trigger an endogenous propagation mechanism with stabilizing properties. This provides the rationale for separating growth and fluctuations, that is, for decomposing the movement of an economic system into trend and cycle. Trend is conceived as the loci of equilibria – a moving center of gravitation – while cycle is restricted to the analysis of the stochastic error term of series and to the properties of the equilibration mechanism.1

The long-wave theory – also known as the Kondratiev's long cycles – sprang from the classical approach, particularly from Marxian analysis that, with its focus on the general laws governing capitalism in the long run, provided a fertile ground for its appearance. Thus it is not by chance that the pioneers (Parvus 1901 [1999] , van Gelderen 1913 [1996], de Wolff 1924 [1999]) belonged to such a school. Although the long-wave phenomenon was already acknowledged in the 19th century, Kondratiev amassed the first substantial empirical evidence in 1925. On the causes of the "long cycle", Kondratiev's contribution was rather weak; Schumpeter, in his Business Cycles, filled the gap in 1939. The systematic explanation he gave is based on technological revolutions and their diffusion. Radical process and product innovations – noted Schumpeter – do not appear at random, but they bring together a bundle of other incremental and fundamental innovations, triggering a "creative destruction" that generates growth while renewing entirely the structure of society.

The last three decades saw a flourishing literature that developed Schumpeter's insights, studying particularly the motives and mechanisms of innovations as well as their systemic and institutional components.2 Three features of the system, which interact with one another, are at the roots of the recurring sequence of waves:– the fact that technological change occurs by clusters of radical innovations forming

successive revolutions that modernise the whole productive structure;– the functional separation between financial and production capital, each pursing profits by

different means; and – the much greater inertia and resistance to change of the socio-institutional framework in

comparison with the techno-economic sphere, which is spurred by competitive pressures (Perez 2002, p.6).

2. The debate

Economists are divided on the nature and interpretation of the long-wave phenomenon, and for many of them this is a matter that has still not been settled. Two areas are object of intense debate. First, on the facts – are long-waves a real phenomenon ? Second, (given the first), what is the nature of the long-term movement?

(a) The first problem arises because econometric research from the 1980s onwards does not give unambiguous support to the existence of long waves in output. One could quote, at this purpose, a long list of empirical works leading to contradictory results3; to illustrate the

1 For a thorough discussion see Louçã (1997)2 See, for instance, the collected readings in Freeman (ed. 1996) and Louçã and Reijnders (ed. 1999). See also Tylecote (1992; 1994)3 See Freeman (ed. 1996, part IV) and Louçã and Reijnders (ed. 1999, part II).

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slippery nature of this subject, we just mention the case of Metz. In 1992, using new filtering techniques, this author presented robust evidence on the existence of long waves (Metz 1992). In 1996, relying on different econometric techniques, he was unable to detect a long wave movement in the same data he used for his 1992 research (output series for Germany)! (Metz 1996).

Freeman and Louçã (2001) discuss this methodological question by considering two classes of models: (i) the traditional statistical and econometric analysis, and (ii) the simulations from formal models. The first type of models identifies long waves by separating the cycles from the trend on the basis of several techniques (moving-average smoothing techniques, growth rate computation, spectral analysis). Freeman and Louçã criticize this approach on two grounds – theoretical and technical. On the theoretical level they observe that the rationale for separating growth and fluctuations is based on the general equilibrium paradigm and the "rocking horse" metaphor – something that implies a number of strong and unrealistic assumptions on the nature of the trend (trend is deterministic and is related to equilibrium; it is stable over very long periods; trend and cycle are independent). However, if the trend is stochastic and/or influences the cycle, then the breakdown is indeterminate (Louçã 1997, p. 192). This latter point has been demonstrated by Pasinetti (1981, p. 232-236), who showed that the structural dynamics of the economy (technical change and new patterns of demand) – which establishes the trend – also generates the cycle as an inevitable consequence.

At the technical level there is the question of "cleaning" the historical series from the influence of trend, since the usual statistical techniques to identify long-waves require that series be stationary. The problem is that the detrending procedures of the original data are not neutral with respect to the results on the existence of cycles: "the smoothing techniques may create artefacts" (Freeman and Louçã 2001, p. 99). This criticism also applies to spectral analysis – one of the most sophisticated techniques to study long-waves4. In addition, spectral analysis faces other specific problems resulting for instance from the relative shortness of the available data (that usually cover 200-250 observations, which is insufficient for a correct application of the method in question) and from the fact that it requires a regularity in the amplitude of cycles – something that is not found in reality and that is not necessary to assert the reality of long-waves.5 The second type of models (the simulation models) was developed in the 1970s by J. Forrester (1997), from MIT, and consists of constructing a mathematical model that mimics the evolution of real aggregate economic series. The resemblance between the computed and the historical series is deemed sufficient proof of the causal links identified by the long wave-theory. Although recognizing the interest of this approach, one can argue that it suffers from serious limitations "since simulation is not demonstrative proof. … Models are useful metaphors for the creation of hypotheses in order to analyze reality, but they are not the reality itself, nor can they reproduce it" (Freeman and Louçã 2001, p. 117). Thus we sympathise with Freeman and Louçã’s model of "reasoned history" – an approach that does not reject quantitative analysis but that goes far beyond it by adopting a complex determination approach, in which the purely statistical evidence is put on the same footing as

4 Spectral analysis is a method to discover the hidden periodicity of a time series. It consists in decomposing the total variance of a stationary series into the contribution of individual frequencies, with different amplitude. It thus allows simultaneous estimation of the relative importance of cycles of different frequencies (short-term cycles, Juglar or investment cycles, Kuznets 15-25 year cycles, long waves).5 Within this context Freeman and Louçã address the question of the a priori elimination of the impact of the war periods, that can be seen as "disturbances" in the normal structure of data. According to some empirical studies (e.g. Metz 1992), only the interpolation for these periods allows the existence of long waves to be confirmed. Freeman and Louçã condemn such a procedure since "erasing part of history is not a method to study history" (cit., p.116).

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social, institutional and political factors, represented by the "semiautonomous" variables. In other words, history provides the final criterion for the detection of the turning points of cycles and for the interpretation of the results. This also means that, for a complete explanation, it is necessary to supplement a statistical identification of long waves with an explanation of how institutional constraints and economic processes give rise to particular statistical outcomes.

Note, however, that this does not undermine the possibility of constructing a theory of growth since the reasoned history model is indeed capable of identifying and explaining recurrent phenomena, as well as special cases: "the fundamental(..) [laws] still apply as time goes by", even though each period has its own unique characteristics that Kronos swallows forever (Freeman and Louçã 2001, p.122).

(b) The second problem concerns the alleged quasi-cyclical pattern of long-waves. Some maintain that what are called long-waves (or long cycles) are instead phases of capitalist development – i.e. structural change – that, as such, have unique and unrepeatable characteristics (Solomou, 1987, Maddison 1981). In particular, long waves would be correlated with the rise and decline of an international hegemonic power: UK in the 19th century and the beginning of the 20th, the US afterwards (Arrighi 1994).

All this is not contested by those arguing that the long-wave has a quasi-cyclical nature, but they observe that, in spite of the peculiarities and the unrepeatable character of each wave, it is possible to single out some common causes for the upswings and the upper turning points of the four long waves that we experienced since the industrial revolution, and that are summarised in table 1. The driving forces and mechanisms of this stable causal structure provide the theoretical framework for analyzing the economic development of the last two centuries.

3. The unifying characteristics of long-waves

In fact, two recurrent phenomena justify the concept of "wave" rather than simply "stages" of capitalist development: (i) the technological revolutions that are at the root of each wave (see table 1), and (ii) the structural crises of adjustment. On the first point, historical experience allows the following generalizations (Perez, 1983, 2002; Freeman and Louçã 2001, p. 147-148):

• each long wave relies on the availability of one or more key factors - or "core inputs" - (iron, coal, steel, oil, electronic chips) that are supplied at low and falling relative cost in almost unlimited quantities over long periods and have a potential for use in many products and processes throughout the economic system. The sectors producing these core inputs (the "motive branches") became major industries with each successive wave;• the new products based on the core inputs and some complementary inputs stimulate the rise of other new industries ("carrier branches"), whose rapid growth and great market potential give a strong impetus to the growth of the entire economy. A process of cumulative growth can start, reinforced by the other branches that follow in the wake of the leading sectors (the "induced growth branches");• new infrastructures are needed to serve the new industries and this, in turn, stimulates the further growth of both motive and carrier branches;• the structural change arising from the technological revolution requires organizational innovations needed to design, produce, use and distribute the new products and processes. Gradually new "common sense" rules for managing and organizing the new

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technology emerge through trial and error and extend from new industries to the old ones. It is what is called a new "techno-economic paradigm", or "new technological style".

The second point (the crises of adjustment) relates to the fact that the take-off and the generalization of new "techno-economic paradigm" are far from being a smooth process, as they entail acute social conflicts and class struggles. In fact, the new paradigm starts its diffusion during the long stagnation – when the old paradigm has exhausted its possibilities – and, during this period, strong vested interests, habits, routines, cultural norms and regulations associated with the previous paradigm oppose to change. The downswing of the long-wave is thus a period of great turbulence and conflict, characterized by a mismatch between the techno-economic subsystem and the institutional structure.6 Tylecote (1994, p. 484) distinguishes four types of mismatch: (i) microeconomic, if the organisation of the firm is unsuited to the new technological paradigm; (ii) macroeconomic, when the diffusion of the new technological style goes together with the development of imbalances, particularly income inequalities that prevent the required expansion of consumer demand; (iii) sociopolitical mismatch, such that a sociopolitical crisis arises out of the diffusion of the new style. The downswing is overcome only when a new institutional structure replaces the old one, conducing the system towards a period of stability and growth.

This is really a crucial point – a point that echoes the Marxian analysis of the contradictions of capitalism as source of crisis7 and that distinguishes the long-waves theory from technological determinism. In the uneven process of structural change that characterizes the incipient long-wave at the international level, the winners are the countries that adapt their institutions more rapidly to the requirements of the new techno-economic paradigm. The countries that do not succeed in adopting the appropriate institutional changes would be excluded from the benefits of the new techno-economic paradigm; others that adapt slowly or insufficiently would delay the appearance of the new long wave8. In this sense the long wave theory is not a forecasting tool, social evolution being an open-ended process.

4. Technological revolutions and finance capital

Perez (2002) pushes forward the theoretical frontier of long waves by investigating the financial aspects – a task that is fulfilled by combining economic analysis, sociology and history. In this way she is able to clarify the mechanisms explaining why, at a certain period of the installation phase of the new technological paradigm, financial capital progressively abandons its instrumental role with respect to productive capital and becomes the dominant player of the game. Instead of being a facilitator for the accumulation of productive assets, financial capital assumes an independent life, decoupled from productive activity, and directs the economy according to its interests and criteria.

6 The term "institutional structure" should be understood in a broad sense, including not only regulation, norms and standards, but also the system of social relations, the national and international financial structure, etc. It corresponds to what the French school of regulation call a "regime de regulation" (Aglietta 1997; Boyer and Saillard 1995).7 See on this Screpanti (1984), Rosier and Dockes (1983). In his Marxist interpretation of long-waves Mandel (1995) too puts great emphasis on the social conflicts resulting fom the contradictions accumulated during the long expansion as one of the main causes of the upper turning point of the wave.8 On the risks of a failure of the “new economy”, see Freeman (2001). O’Hara, (2002; 2003) explains that a new long wave upswing has not yet emerged in the US because appropriate institutional adaptations are still lacking.

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Figure 1 depicts the four phases of each technological revolution. The process of installation and deployment of each paradigm in all spheres of society raises a “great surge of development” (Perez 2002)9. Phases one and two form the installation period of the new paradigm from the early diffusion of the new technologies to their full visibility. Perez denotes them as irruption and frenzy, this latter term referring to the role financial capital assumes. Phases three and four constitute the deployment period, when the technical, organisational and institutional components of the techno-economic paradigm are fully adapted, (phase 3: the synergy), then reach maturity and start to show inadequacies, announcing the exhaustion of the potentialities of the paradigm (phase 4: the maturity). In Perez (2002) characterisation, the irruption is “a time for technology”, frenzy is “a time for finance”, the turning point is the time for “rethinking and rerouting development”, the synergy phase is “the time for production” and maturity is the “time for questioning complacency”. She also calls the early applications of the new technologies the “big bang”, taking the form of a highly visible event that symbolises the whole potential of the technological breakthrough and that is able to attract a cluster of pioneers10. The “big bang” is preceded by a gestation period that can be very long and operates during the maturity phase of the previous long wave. Thus, at the end of each wave, two distinct processes coexist: on the one hand, the incumbent techno-economic paradigm has to cope with market saturation for its products and with the very limited scope for further innovations; on the other hand, some dynamic entrepreneurs draw on the available stock of inventions and scientific discoveries to transform them into radical process and product innovations. Such a coexistence of the old phase with the incipient one creates a socio-political split as, when the new technological revolution irrupts, the logic and the effects of its predecessor are still dominant and exert powerful resistance. It follows a period of great uncertainty and turbulence, calling for structural and institutional adjustment. Figure 2 synthesises the process.

To facilitate the understanding of the proposals of part II of this paper, it is useful to give more details on the different phases of the long-wave.

5. Further details on the four phases of the long-wave

(a) The irruption phase is a period of contrast, as the beginning of the technological revolution surges amidst a world threatened with stagnation. The decline of old industries as well as high and increasing unemployment juxtaposes the intense activity of entrepreneurs operating within the new technological style. A mass of money capital, still generated by the firms of the old paradigm, is available and looks for opportunities. There is also a marked revival of the stock market, first in relation to the new industries and soon after with new financial instruments and speculation.

(b) In the frenzy phase, “financial capital takes over; its immediate interests overrule the operation of the whole system. The paper economy decouples from the real economy, finance decouples from production while there is a growing rift between the forces in the economy and the regulatory framework, turned impotent” (Perez 2002, p. 50). This is a time of turbulence, with large and growing inequalities in the distribution of income. The wealth that has grown and concentrated in relatively few hands is greater than what can be absorbed by real investment; speculation flourishes and the economy tends to become a

9 The rest of this paragraph and paragraph 5 summarize Perez (2002)10 The “big bang” for the present long wave was the announcement, in 1971, of the Intel microprocessor in California. In the fourth long wave it was the production of the first model-T car in the Ford plant in Detroit, etc.

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“casino capitalism”, with asset inflation in the stock market. “Late Frenzy is financial bubble time” (id., p. 52) and financial crashes eventually draw the system into recession.

Yet the frenzy phase is also one of intense exploration of all the possibilities opened up by the technological revolution. Through a trial and error process of investment, “the potential of the diffusing paradigm for creating new markets and for rejuvenating old industries is fully discovered and ... installed in the economy and in the mental maps of investors. Hence the productivity explosion reaches more and more activities, inducing a process of restructuring ... where the new or renewed prosper and the old wilt and die. The process is intensified by the availability of the new infrastructure.” (cit., p. 51).

(c) The turning point represents the fundamental change to move the system from the frenzy mode, shaped by financial criteria, to a synergy mode, based on the logic of production. As Perez (2002, p. 52) explains, such a process “can take any amount of time, from a few months to several years”, since the structural tensions created by the frenzy phase can be overcome only through institutional recomposition. “This essentially means that adequate regulation of financial capital has to be established and an institutional framework favouring the real economy over the paper economy needs to be put in place. Yet financial capital will resist with force” and it “is only likely to accept regulation after much of the rapidly made gains have evaporated in the collapse and when the recession has shown the practical impossibility of reviving the casino” (cit., p. 111)11.

It should be emphasised that there is no mechanical sequence to be found in this re-regulation of society. In fact, “nothing guarantees that decision makers will take this route. This is, in fact, a time of indetermination, when the particular mode of growth that will shape the world of the next two or three decades is defined. Its characteristics will be within the range made viable by the potential of the paradigm, but the choice within that wide range will depend of the interests, lucidity, relative power and effectiveness of the social forces participating in the process.” (Perez 2002, p. 53).

This uncertainty of the final issue does not undermine the possibility of a theory. In fact, "what is significant, in terms of the value of the model, is that there are causal chains and identifying features that can help the analysis and the interpretation not only of the regularities but also of some of the deviations from the basic pattern” (cit., p. 123).

(d) If the process of rerouting the system ends successfully, the system enters into the “golden age” of the synergy phase. Even if the mode of growth continues to be shaped by the interests of financial capital, it is now more directly tied to production than in the frenzy phase. Production becomes the key word, full employment becomes a possibility and social cohesiveness can be established. The logic of the new paradigm permeates every activity, from business to government and education.

(e) What drives the system to maturity is the exhaustion of the technological possibilities of the paradigm: when the diffusion of the technological revolution is complete, productivity cannot grow substantially any more. Markets are saturating and profits feel the productivity constriction as well as the effects of the social struggles that, historically, have characterised this phase of the wave12. The system enters into stagnation. This switches attention to the next generation of radical technical change, opening the door to the installation period of the new long wave.

11 Perez (2002, p. 115) observes that there are three structural tensions that make it impossible to keep the frenzy process going for an indefinite time. There are tensions between real and paper wealth, between the profile of existing demand and that of potential supply in the core products of the revolution, and between the socially excluded and those reaping the benefits of the bubble.12 For an analysis of the latter aspect see Screpanti (1984) and Rosier and Dockès (1983)

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II. AN ECONOMIC POLICY FOR THE FIFTH LONG-WAVE.A EUROPEAN VIEW

(II.1) An appropriate theoretical reference

1. Within a long wave perspective, the main concerns of both macroeconomic and sectoral policies should be the diffusion of the new techno-economic paradigm resulting from ICT. In what follows, some indications in this sense will be given considering, from a European point of view, the macroeconomic conditions for stimulating innovation and growth, the necessity to re-establish the primacy of productive capital (the “de-financiarization” of the economy), the possible features of a wage nexus appropriate to the new long-wave, the labour market policy and the regime of intellectual property rights. We shall not deal explicitly with the problem of adapting the skills of the labour force to the requirements of the new technological style by public and private investments in vocational training, general education and research. This is a decisive pre-condition for the diffusion of the technological revolution on which, fortunately, there is enough public awareness. Thus it is not necessary to insist any more on it in the present work.

Two limitations of the analysis presented below must be emphasised. First the arguments to be treated are chosen on the exclusive basis of what is deemed crucial to favour the full implementation of the new long wave in Europe. Thus, they are far from exhausting the list of the most important topics to be dealt with by economic policy in the years to come. Other subjects of equal importance for the general economic policy are left aside and cover, for instance, new forms of taxation, ecological sustainability, the elimination of the gap between the North and the South of the world, a fair international order and, last but not least, the problem of employment. In fact, the analysis conducted elsewhere by one of us (Reati 1998; Michie and Reati (Eds.) 1998 ch. 5) led to the conclusion that, due to the pervasive character of the present technological revolution in ICT, in the medium to long term the employment trend will be one of stagnation or even decline. It is thus necessary to devise an economic policy to counter this unfavourable trend; in our view such a policy should focus mainly on shorter working time.

The second limitation of the proposals below is that they should be considered more as indications of the direction to follow than detailed recipes. The institutional and policy adjustments required for the successful implementation of a new long-wave are indeed a societal stake and, as such, they are the object of intense social and political struggles between the forces that oppose change (because they benefit from the status quo) and the forces that want to promote it. In addition, this type of conflict is modulated by the more general struggle for social justice. Thus, it is obvious that one cannot predict the precise features of the final outcome.

This does not mean, of course, that economic policy has no role to play in this conflictual context. It can, first of all, establish the general economic environment favourable to innovation. Second, it could favour the solution of social conflicts by providing an appropriate regulatory framework assuring that the aspirations and legitimate interests of the weakest components of society are protected. Third, there is a large scope for adapting the existing technical and financial regulations to the needs of the new paradigm. Before dealing with this point, we would like to comment on the policy followed during the last 25 years or so.

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2. Contrary to the US,13 in most European countries, the economic policy of the 1980s and 1990s was more and more inspired by the neoclassical theory, including the Vulgate of the aggregate production function and the Solow growth model.14. In our view, this is the fundamental reason why, after more than two decades, the results in terms of employment and growth are so poor15. Two characteristics make the neoclassical theory unsuitable to inspire economic policy in the present period of deep structural change, viz. it’s a-historical character and its approach to cycles and equilibrium.

The first point refers to the fact that neoclassical theory aims at finding some general laws governing the behaviour of a “representative” agent in any time in any place. Social classes are generally excluded as the unit of analysis (society is conceived as the sum of individuals), which is consequently impoverished and loses its possibility to guide the evolution of real economies16.

In the neoclassical theory business cycles are produced by exogenous shocks that produce deviations from the long-term equilibrium trend. Then market forces trigger an endogenous propagation mechanism with stabilising properties: it is the already mentioned “rocking horse” metaphor, contending that the economic system tends spontaneously to equilibrium and full employment17. Thus, to attain this result, it is important that market forces can play freely, and attention is focused on the elements that impede such a free play of the market, i.e. the “imperfections” and rigidities of the markets and government interventions.

To illustrate how this pre-keynesian argument can lead economic policy off track, consider the problem of unemployment. During the 1960s and 1970s, in the European Union there was at the same time very rigid labour markets and full employment (i.e. a rate of unemployment around 2%); now the situation is reversed: European labour markets are rather flexible (even very flexible in some instances, e.g. UK and Italy), but the rate of unemployment is, apart from some exceptions, four times higher. It is thus evident that the cause of the present unemployment is not to be found in the “rigidities” of labour markets, and if our policy is essentially oriented towards the elimination of such rigidities we miss the target, with the result that the problem aggravates. In other words, the neoclassical theory diverts attention from the essential, that is how to promote the structural change that could make full employment possible. The elimination of some rigidity could help, but these are only peanuts !

(II.2) Suggested directions – selected issues

(a) The case for a Keynesian policy of demand

13 See below14 Things substantially improved with the endogenous growth theory, drawing attention on human capital and research to overcome the limits to growth. Unfortunately, this theory too suffers from the conceptual shortcomings resulting by the use of aggregate production functions with the standard neoclassical properties.15 Consider, for instance, the present high unemployment rate at the European level.16 Adam Smith, who is considered the main source of inspiration of the neoclassical theory, organised his enquiry on capitalism on the basis of social classes instead of individuals, and the same approach was taken by the other leading classical economists (Ricardo, Malthus, Marx). Thus, instead of “neo”-classical, modern mainstream economics is rather “anti”-classical! For a development of this argument that focuses on institutions see Hodgson (1988).17 Of course, mainstream mathematical economics offers numerous examples of explosive models – depending on the values taken by some parameters of the equations – but, for practical purposes, convergence is usually assumed.

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1. The problem here is to have a macroeconomic policy supportive of innovations, in order to facilitate the full deployment of the new technological paradigm. Here one should distinguish radical innovations – those that establish a new technological paradigm – from incremental innovations, that operate within an existing technological style. The former are those able to provoke a new upswing because they produce a leap in the level of labour productivity of the innovator and sustained growth in the productivity of the economy; the latter can only keep the system on low-growth path, as they prolong the effects of the previous technological revolution. The long-wave literature has shown that the major innovations materialise during the depression phase of the long-wave (the “maturity” in Perez’s more neutral terminology); they tend to appear in the existing industries and concern processes as well as products (Van Duijn 1983). Mensch (1979) explains this somewhat paradoxical fact noting that, when depression reaches its deepest point and enterprises have a very poor (or even negative) profitability, capitalists are faced with a choice: either they innovate, bringing the rate of profit to a normal level, or they disappear. Innovations overcome depression. In Perez’s model this forms the phase one of the installation period (fig 1 and 2).

At this point, for the process of radical innovations to continue, it is necessary that capitalists – or innovatively inclined managers of socially-owned firms – foresee good prospects for demand. Were this not the case, old firms that survived from the depression and newcomers would hardly invest in new processes or engage in the market for new products. It is the “demand-pull” hypothesis, saying that innovation activity of firms is positively correlated with the growth of demand (Schmookler 1966). Such a hypothesis holds for both radical and incremental innovations and has found empirical support (see Brouwer and Kleinknecht 1999 and the references they quote).

At present, the new technological paradigm based on ICT has already overcome the first phase of its diffusion in all European countries and in the US, and it is now progressing at different speeds along phase two (fig. 1). For Europe, a full expansion of innovation and market potential crucially depends on good prospects for aggregate demand. As suggested below, this can be achieved without introducing disequilibrating elements into the system.

To conclude these preliminary considerations, it is worth noting that it is precisely the dynamic of demand during the last decade that explains the different degree of diffusion of the new paradigm in the US and in the European Union. In fact, to fulfil the Maastricht criteria, Europe was constantly submitted to rigid demand restraints, something that slowed down innovation. The US took the opposite route, adopting a very expansive economic policy with lower and lower interest rates, strong increases in military expenses, generous support to research, very easy credit to consumption. Thus, notwithstanding the official declarations, the US economic policy generally did not follow the neoclassical recipe of budgetary orthodoxy, but it was a mixture of Keynesian demand support plus a (not necessarily Keynesian) deficit spending. This resulted in two big deficits: –4.8% of GDP for the public budget in 2003 and –5.6% of GDP for the current external transactions.18 It is well known that the US can afford these imbalances thanks to their privilege to control the money for international transactions.

2. To boost aggregate demand we should act on investment as well as on private consumption.

18 For the decade 1983-1992 the deficit of general government amounted to an average of –4.7% of GDP. The only exception to easy public finance was during the years 1996-2001, when deficit was modest or there was even a surplus (1998 to 2000). Source: European Commission, EC Economic Data Pocket Book, n. 7-8,2003, p. 40.

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Consider first public investment. Accepting the already existing proposal to exclude this type of investment from the 3% deficit criterion could appreciably ease the current constraints on public finance stemming from the Maastricht treaty. In 1993 public investment in EU-15 amounted to 2.4% of GDP (3.3% in the USA and 4.4% in Japan) while, before the long stagnation, it represented on average 4% of GDP. 19 Comparing the present situation with the relative level attained at the end of the long expansion, we thus see that the suggested modification of the Maastricht criteria would give ample room for boosting growth without perturbing the normal functioning of the system.

It is, in fact, a golden rule of Keynesian economics that, while public consumption expenditure must be covered by fiscal receipts (a balanced current budget), public expenditure for physical capital can be financed by debt also. This does not introduce an unbalancing factor into the system because the liabilities of the public budget (the debt issued to buy the productive capital) find their exact counterpart in the productive assets registered on the other side of the budget. Since these physical capitals produce a flow of income, it becomes possible to pay the interests and gradually refund the debt (Pasinetti 1995).

In any case, as was demonstrated by Pasinetti (1998), the sustainability of public finance is realised when there is a decreasing (or at most a non-increasing) ratio of public debt to GDP in nominal terms. Thus, the fact of fixing the targets to 60% for the public debt/GDP ratio and to 3% for the deficit/GDP ratio represents an unnecessary restriction, with no theoretical justifications.

Private consumption can be raised by re-establishing the link between productivity growth and wage increases – a link that was one of the institutional settings favouring expansion in the fourth long-wave in most European countries (the “Fordist” period) and that was broken during the last two decades. In fact, as we can see from fig. 3, the rate of profit in the European Union follows a growing trend since 1980, in such a way that the present level of profitability is higher than the peak it reached during the long expansion of the fourth long wave (year 1969). For the US, the situation is similar.

Two polar possibilities to sustain private consumption are open, both being compatible with price stability and the invariance of the profit share: (i) wage increases of the different industries (or firms) are tuned on the productivity growth of the same industry; or (ii) wage growth is indexed with the average productivity increase of the economic system. Of course, this alternative way to connect wages with productivity can assure a stable price level only if the enterprises experiencing productivity increases higher than the average decrease their prices accordingly, and the opposite for enterprises with productivity growth less than the average. This second possibility is preferable from the point of view of equity because it allows all people to share the benefits of technical change.

Considering that the suggested link of wages with productivity will keep unchanged the unit labour cost, such a policy, if generally adopted in Europe, will not produce, by itself, a delocalisation of productive activities towards low-wage countries.

(b) Re-establishing the primacy of productive capital.

1. Securing long-term economic expansion underpinned by technological innovation requires appropriate financing mechanisms. Such mechanisms are necessary to ensure that companies can adequately finance their investments and technological improvements, but also to ensure

19 Source: European Commission, European Economy n. 5, 2003 (p. 120) and European Economy, Supplement A, n. 10/11, 2000 (p. 64)

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that such financing is directed towards improving the capital stock, on whose expansion the growth of labour productivity depends. The recent collapse of the new technology boom in the United States, and the earlier financial debacles noted by Perez (2002), have highlighted the potential of inappropriate financial arrangements to disrupt the process of technological innovation. The fact that the United States and the United Kingdom have devoted a lower proportion of their GDP to fixed capital formation than other, less financially advanced countries, despite their recent financial boom, suggests that the design of financing mechanisms is crucial for innovation and long-term economic growth. The defenders of the market system of finance prevailing in U.S. and U.K. would of course argue that this system secures greater economy of investment than the bank-based systems that characterise capitalist countries with higher rates of investment.

This is merely the latest phase of a debate about the appropriateness of particular financing arrangements that goes back to Adam Smith and Saint-Simon. Contributors in the last century have ranged from Irving Fisher and John Maynard Keynes, to most recently H.P. Minsky, R.I. McKinnon and E.S. Shaw. A critical paper that highlights many of the issues that we raise in this section is Fontela (1998).

2. In advanced capitalist economies, mechanisms for financing investment can be broadly divided into those that are speculative and those that are accommodating.20

Speculative mechanisms are driven by expectations of refinancing possibilities in the financial markets. An investment financed by a loan or an issue of securities may be refinanced in the financial markets by the holder of that loan or securities selling them. Obviously, the profit on the sale of the loan or securities is an additional incentive to engage in such financing. It has the advantage that it is not paid out of the proceeds of the investment which the loan or securities originally financed, but by someone who is willing to buy the loan or securities at a higher price than the original value of the financing. That higher price depends on the liquidity in the financial markets. If there is excessive liquidity, then securities prices will be rising, and there will be a good market for speculative finance. If there is insufficient liquidity in the markets, then it will be difficult or impossible to refinance at a profit.

However, speculative financing mechanisms are ephemeral. If financial markets become less liquid, then the inability to refinance at a profit causes speculative finance to dry up. Any existing financings come to rely for their profit on the revenue from the investment financed. This revenue depends on the kind of business in which the investment is being implemented. Usually retail services (shops, trading activities) have good cash flow, even when they are less profitable. Typically, new technology has very uncertain cash flow, which is why investments in it are all the more dependent on refinancing possibilities in the financial markets. Any decline in the liquidity of the financial markets, or in the return from new technology therefore tends to cause speculative finance to shift away from new technology and into established trading activities, which have good or at least predictable cash flow, but offer relatively few opportunities for industrial innovation.

Thus speculative finance is an inconstant source of financial support for new technology. This is very apparent in the record of venture capital, which is such a feature of American and British new technology financing. Venture capital depends on an ‘exit strategy’ which involves the refinancing of the initial investment through an Initial Primary Offering (i.e., the sale of new shares, IPOs) out of whose proceeds the initial finance put up by venture capitalists is returned with a profit. With the collapse of the NASDAQ market in the U.S., and the decline of the established stock market since 1999, it has become very difficult to issue initial primary offerings profitably. Accordingly, venture capitalists in the U.S. and Britain

20 This corresponds approximately to the distinction made by Keynes in chapter 12 of his General Theory between speculation and enterprise (Keynes 1936)

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have switched their portfolios towards old technology retail and trading activities with better cash flow. In any case, manufacturing innovation usually requires larger sums to invest in production lines, rather than high tech prototypes or software. Even at the peak the new technology boom at the end of the 1990s, the articles embodying new technology were usually produced by larger corporations less speculatively financed. Where there was an interest in financing new technology in the financial markets, this interest was typically in soft-ware ventures employing little productive capital (and hence with little immediate labour employment impact). Such ventures are easier to refinance because they have limited or predictable additional financing needs.

3. In contrast with speculation, accommodating financing mechanisms are driven by the profit expectations of entrepreneurs. As a check on the realism of these expectations, innovations are best undertaken in existing corporations using their own financial resources. This ensures that decisions to finance particular innovations are made by individuals with knowledge of the industrial potential of innovations, and the market for their eventual output. Adam Smith had argued this over two hundred years ago.

A precondition for accommodating finance is the elimination of financial inflation raising the market value of financial claims. Financial inflation is, as argued above, the condition for speculative finance of innovation. But it also has three other undesirable effects on the capital formation of business corporations. First of all, the speculative gains that may be obtained with financial inflation are the opportunity cost of other investments, in particular in fixed capital formation. Therefore the greater is financial inflation, the less attractive is industrial innovation to business corporations. Firms can make more money more quickly through merger and acquisition or management buy-out activity than from long-term commitment to productive activity. Secondly, speculative positions taken in financial markets by non-financial corporations, most notably through merger and takeover activity, but also through other kinds of purchase and sale of assets for profit, require liquid assets to held in addition to the funds committed to actual investments in financial assets. This is because the ever-changing conjuncture in financial markets increases the risk that assets may not be able to be realised at a profit as planned. This additional liquidity reduces further the amount of its own resources which a company can commit to new technology and fixed capital formation. Thirdly, the inflation of the market for long-term securities leads to the over-capitalisation of non-financial corporations. Like over-indebtedness, over-capitalisation, or holding capital in excess of the value of productive capital, increases the liquidity preference of companies, and discourages investment in relatively illiquid fixed capital and new technology. (Toporowski 2000, Part I).

Eliminating financial inflation, without causing a deflation of the kind that Japan has experienced since 1990, is not easy. The conventional wisdom is that it can be done by interest rate changes and/or by ‘moral suasion’, for example Alan Greenspan’s famous pronouncement in 1996 concerning ‘irrational exuberance’ in the markets. The difficulty with interest rate changes is that, to have an effect on the markets, changes in interest rates usually have to be quite large. This precludes fine-tuning of the markets. Moreover, interest rates are nowadays used to target inflation or economic activity. Adding a third target, of financial inflation (however measured), may lead to increased confusion and uncertainty in the markets if, for example, inflation and economic activity are stable or falling, but the stock market is rising strongly.

4. An alternative way is to use open market operations for the purpose of regulating liquidity in the financial markets rather than, as at present, to enforce a target short-term rate of interest in the money markets. In this way, if stock markets were rising so strongly as to

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encourage speculation in them, central banks would sell securities to take excess liquidity out of the markets and slow down the growth of securities prices. If the government or companies had new stock issues which they wanted to make, the central bank would buy in stocks to ensure adequate liquidity was available in the market to take up those stocks. Such open market operations would therefore facilitate a more active fiscal policy on the part of governments, as well as more accommodating finance for corporations. Indeed, open market operations of this kind are already undertaken, but not systematically. Intervention of this kind in the capital markets could not eliminate economic instability (Toporowski 2003). But it would eliminate that part of it which emanates from alternating episodes of excess and deficient liquidity in the markets.

5. The main institutional difficulty preventing such open market operations is the lack of capital of central banks in relation to the amount of turnover in securities markets. On global scale this could only be remedied by capitalising central banks on an appropriate scale. There are practical and political difficulties with such a strategy. In the first place, most central banks operate in countries with very small or non-existent capital markets. A well-capitalised central bank may through its open market operations help to induce a more active capital market, and this possibility should recommend this scheme to the proponents of financial liberalisation or ‘financial deepening’. But there would be a difficulty in getting such capital in undeveloped markets. Raising capital in the more established markets of the financially advanced countries would expose the central bank of a developing country to exchange rate risk in its operations and dependence on the political support of central banks and governments in the financially advanced countries, most notably the U.S. government and Federal Reserve system.

Within Europe, such practical and political difficulties have largely been removed by the new institutions of the European Monetary Union and the European System of Central Banks. Central banks in the European Union could be capitalised by an issue of long-term securities by the European Central Bank (ECB) that would be bought by national central banks, with money borrowed from the ECB at the same rate of interest as is paid on the ECB bonds. In this way the balance sheets of all these institutions could be expanded, but would balance: A national central bank would have its liabilities increased by its borrowing from the ECB, but would have assets corresponding to this borrowing, in the form of the ECB bonds. The ECB would then undertake to buy back these bonds for cash at their issue price at any time from a national central bank. This would give central banks the capital and liquidity to intervene effectively in financial markets.

National central banks would then be in a position to calm excessive stock market speculation by selling their ECB bonds into the market. They should be able to sell them at their issue price, because buyers would have the assurance that these securities would always be liquid at that price (the national central bank could always buy them back and sell them back to the ECB at that issue price). If markets fell, and became illiquid, then the ECB could always sell the bonds back to the ECB for cash, and then enter the market with that cash to buy ECB bonds and government securities to provide liquidity. This system would ensure that the market had adequate liquidity for the purposes of financing government bond issues and company securities, but not so much liquidity that the market became speculative.

This scheme would allow European central banks to pursue systematically what is already done in a partial and unsystematic way by central banks (e.g., in Japan, Hong Kong, and the U.K.). It would provide strong markets for company securities without under-writing the value of particular company obligations. By providing stable liquidity in the market for long-term securities, this scheme would facilitate a more active policy fiscal than is currently allowed under the Stability and Growth Pact. It would also help to remedy the current

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anomaly in European monetary arrangements, whereby the national central banks have responsibility for financial stability, without instruments to secure it in the case of long-term securities markets. (The lender of last resort facility is only effective in the case of bank illiquidity).

If the scheme was open to national central banks in Europe outside the monetary union, the European Union member countries outside the Euro-zone, such arrangements could be extended to support exchange rate stability in Europe. Euros obtained from the resale of ECB bonds back to the ECB could be used to support exchange rates within Europe. In this way a ‘zone of financial stability’ would be created within Europe that would support effective fiscal policy and accommodating finance, whose stability and predictability would focus enterprise on productive activities rather than speculation. The success of such a zone of financial stability in Europe would encourage its emulation elsewhere in the world, and thereby encourage the stabilisation of the global financial system.21

(c) The employment relationship

1. This is the institutional setting that, more than any other, is dependent from the social struggles between workers and employees. The opposing parties have a common interest in reaching an institutional architecture appropriate for the new techno-economic paradigm, as any delay or inadequacies will defer the full deployment of the ongoing long-wave. However, things are not simple, as in both fields there are forces that obstruct progress.

On the workers side, those who still enjoy a relatively secure position tend to be reluctant to change, and this creates an obstacle to the labour flexibility required by structural change (see section d below). On the capitalists’ side, one can detect two tendencies – that we would call “short-termism” and “forward looking”. The first strategy consists of maximising short-term profits, taking maximum advantage of the power obtained by the defeat of workers that resulted from the depression of the 1970s. In fact, the very high unemployment weakened the Unions by reducing the number of their members and undermining the cohesion of those still at work. This made it possible to have real wage growth less than productivity even in the 1990s, when the rate of profit had attained satisfactory levels (figure 3), to implement various forms of labour market flexibility that are not favourable for technical innovation (the “labour-controlling flexibility”, see section d below) and give rise to growing inequalities. The “short-termism” fraction of employers reflects mainly, but not exclusively, the interests of financial capital, and is very much in tune with the “frenzy” phase of the wave that characterised the 1990s in several countries.

The other fraction of employers (the “forward looking”) represents the interests of productive capital and believes that, for the long-term viability of the system, it is better to renounce some advantages resulting from the present favourable power situation by giving room to workers’ claims for fairness and social justice. In other words, it is preferable to win in the long run than winning all along the line in the short-run and risking harming the stability of social order. Keynes and his epigones were the main representatives of this fraction of the bourgeoisie – a fraction that at present covers only a minority. However, it is only by this kind of approach that a new employment relationship favourable to the further diffusion of ICT techno-economic paradigm can be built. Consequently, economic policy should be oriented in this sense. To outline the direction in which this should go, it is useful to start by considering the “Fordist consensus” that preceded the current situation.

21 For an alternative set of proposals, putting emphasis on taxation and international coordination of policies, see Fontela (1998)

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2. The social consensus that made the long upswing of the fourth long-wave in Europe possible (1950-1973) rested on two elements of the regime of regulation: mass consumption, and a comprehensive Welfare State22. The first element of regulation was established by a systematic link between real wages and productivity increases, that provided the demand for mass production. Unions played a crucial role with a bargaining procedure at sectoral level that allowed a parallel and foreseeable growth of real wage and productivity. This created favourable business expectations that sustained investment. In parallel, the regular growth of workers’ purchasing power was complemented by a pervasive Welfare State (the “indirect wage”) giving protection against the main risks and the uncertainty of unemployment.

The Fordist technical basis was an automated and dedicated plant and equipment producing standardised commodities with a rather stable product mix. The organisational structure was hierarchical and departmental. Design and implementation stages of production were separated and performed by two different categories of employees.

The typical worker of the Fordist period was male and low skilled. He benefited from a full-time permanent contract to provide a labour activity as defined by his job profile. The various forms of protection were linked to the professional status, defined in terms of a person's occupation and distinctively associated with the continuity of employment throughout the lifetime.

3. The ICT technological revolution required profound organisational changes that were not compatible with the rigid Fordist organisation and the corresponding employment relationship. However, when assessing the changes in the employment relationship of the last two decades, one should consider that they are not just a question of technology, but are also a consequence of the already mentioned unbalanced power relationship between capital and labour.

The ICT style modified the previous technical basis: flexible production systems tended to replace the Fordist dedicated plant and equipment, and this allowed a customisation of output. Also, the general availability of PCs, the introduction of local area networks and the rapid changes in product and process design eroded the old hierarchical structure, making some layers of management unnecessary. At the same time, ICT technology drastically changed the skill requirements of the labour force – instead of the unskilled worker of the Fordist organisation, the new technology demanded medium to high skilled workers.23

Finally to increase profits, enterprises transferred the hazard of demand on their workers by engaging on a temporary basis, and outside, by outsourcing a range of activities. We now have a multiplicity of work relations (part-time, temporary, “on-call”, traineeship, false self-employment) that create precariousness, uncertainty about the future and loss of individual and collective rights. This last aspect is particularly relevant with the disintegration of the Fordist professional status, that is not any more unique and whose continuity is undermined by internal and external flexibility, the first referring to the fact that a worker is frequently employed in different jobs with the same employer, the second to casual employment. Also, the concept of single employer sometimes vanishes both in regard to the entity concerned (groups or networks of companies) and over time.

4. A reconstruction of the employment relationship appropriate to the ICT technological style that, at the same time, grants to workers the protections typical of a modern society, could be conceived on the lines of a recent report sponsored by the European Commission – the Supiot (1999) report. In this report, the proposals for a reform of the employment relationship are presented under six headings: (i) work and private power; (ii) work and

22 For an interesting description of this wave see Freeman and Louçã (2001, chapter 8)23 See Tylecote (1992, chapter 2) for further developments and historical evidence

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employment status; (iii) work and time; (iv) work and collective organisation; (v) work and the State; (vi) combating gender discrimination. In what follows we shall report only the points that are most directly linked with the purpose of this paper (Supiot 1999, p. 296 ff).

The first set of proposals aim at protecting workers from the insecurity resulting from the causalisation of labour, mass unemployment and new management practices that make subordination weigh more heavily. The suggested guidelines are:– an enlargement of the scope of labour law to cover the new ways in which power is

exercised in companies through, for instance, the use of false self-employed, the introduction of third parties in the form of subcontractors or temporary employment businesses, casual workers who are "invited" not to join a Union, etc.

– the consolidation of a specific status for temporary employment businesses. To cope with the problems resulting from the increasing resort to dependent companies, the notions of “employer’s joint activity” and “joint responsibility” should be introduced

– the application of certain aspects of labour law to workers who are neither employees nor employers, but are in a situation of economic dependence vis-à-vis a principal. This would allow them to benefit from the social rights to which their dependency entitles them.

Concerning the loss of protection that results from the flaking off the Fordist professional status the report suggests:

– to redefine the employment status in order to guarantee the continuity of a career rather that the stability of specific conditions resulting from a given wage relationship. Thus, new legal instruments should be devised to ensure continuity of status above and beyond different cycles of work and non-work (inactivity proper and periods of training), as well as to keep workers’ social rights in case of status changes, for instance from employee to self-employed. The continuity of career should also be kept by granting to workers rights to redeployment in case of dismissal – connecting the employer's right to dismiss to the worker's right to be placed in another job24–, by establishing links between employment and training, between school and working life. In other words, career breaks and shifts in occupations should be considered as a normal part of the employment status, and accordingly ensured by law or collective agreement

– to enlarge the definition of professional status, which should no longer be determined on the basis of the restrictive criterion of employment but on a broader notion of works, that include non-marketable forms of work25. This broader notion of employment status goes hand-in-hand with various kinds of social drawing rights, to exercise on a discretionary basis rather than in terms of an unexpected risk

To reconstruct the system of collective bargaining, the report presents the following guidelines:

– an active support from public authorities for recasting collective bargaining: broadening the scope of bargaining and extending the parties covered and tasks involved should be

24 Several initiatives already exist in the UE. They consist in offering training courses to dismissed employees, in adopting labour plans to offer a worker another post in the company or its group, etc. In Sweden, some collective agreements require employers to contribute to a security fund designed to finance training activities that will enable employees to remain in the company and to help them to find a new job or set up a business (Supiot 1999, p. 82-83)25 Note, however, that the Supiot report rejects “the notion of activity as imprecise. Work is distinguished from activity in that it involves an obligation, voluntarily assumed of legally imposed, under onerous or gratuitous terms, subject to a status or a contract. Work always has some legal connotation” (Supiot 1999, p. 298.)

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encouraged as a response to demands for flexibility. Such support may consist of rules on mandatory bargaining and procedural rules of representation

– with respect to representation, the report finds the exclusive focus on representation at the company level risky. Rather, dual representation (works councils/union delegations) is more complementary than adversarial and should be regarded as reciprocal support. The report warns against neo-corporatist tendencies that refuse to acknowledge alternative forms of representation: the expansion of items for discussion, parties covered and tasks involved automatically entails the acceptance of alternative forms of profiling collective interests by subject areas

– with regard to bargaining arenas, the report stresses the importance of centring the negotiations on networked companies and territorial networks whereby businesses and other interest groups join forces (at local or regional level, for instance). This approach would be a way to meet the challenges deriving from business reorganisation.

To correct for the current decline of the Welfare State, the report advocates a new kind of intervention to be linked to an overall concept of social rights based on solidarity. This solidarity should not be thought of as solidarity face an individual need, but as solidarity guaranteeing individual and collective security in the face of uncertainty. Rather than the concept of social protection, social citizenship might synthesise the objectives of recasting labour law and social law in general. This notion has the advantage of being extensive, as it covers many rights, not just social security; it links up social rights to the notion of social integration and not only to the notion of work, and it enshrines the idea of participation.

(d) A targeted flexibility of labour

1. As already noted, the diffusion of ICT technological style and the ensuing changes in patterns of demand modify substantially the organisation of enterprises as well as the structure of the economy. At the enterprise level, workers should acquire new skills and accept more flexible structures implying, among other things, different working time. At the level of the economy, radical product innovations create new industries, the sectors adopting radical process innovations increase their share of total output, while the traditional sectors decline. This diversified impact of technical change entails a permanent shift in the structure of employment, which calls for a continuous flow of workers from contracting to expanding sectors. The required mobility of labour is not easily obtained, and this provides considerable scope for government action. Besides disseminating appropriate information on labour market opportunities, the most important task for public authorities is to provide constant retraining and skill development for the population. Second, to facilitate the geographical mobility for workers, government should provide the basic infrastructures for families (infant schools, etc.) in the expanding regions and stimulate the supply of lodgings. This kind of labour flexibility that is required by structural change should be actively pursued, as it is growth-enhancing and directly targeted to job creation; it is also a prerequisite for obtaining all the benefits in terms of costs and competitivity which can result from the ongoing technological revolution in ICT.

2. However, contrary to what is frequently assumed, other forms of labour flexibility represent a positive obstacle to a successful diffusion of the new technological style, and should then be opposed. we are referring here to the forms of flexibility whose principal aim is to submit labour to capital (labour-controlling flexibility), and consist in making jobs more precarious, in imposing part-time working, in reducing social protection by transforming

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normal employees into self-employed workers, in increasing inequality by cutting wages at the bottom of the scale, in facilitating dismissals.

Consider, for instance, the conditions for a successful implementation of ICT at the enterprise level. It is generally admitted that, to attain such an objective, a close involvement of the labour force is necessary, involving trust and participation. Such conditions are hampered by short-term labour contracts with no guarantee of stability and by downward wage flexibility. Concerning this latter aspect, one should refer to the theory of efficiency wages, which shows that workers’ effort and commitment (hence productivity) is positively correlated to the level of wage; wage reductions can thus reduce workers’ involvement and hamper the successful adoption of new technologies (Kleinknecht 1998; Michie and Sheehan 2003). Furthermore, the wage flexibility in question increases the propensity to save of workers and the middle classes as a reaction to uncertainty, and this would tend to reduce the effectiveness of aggregate demand policy.

Innovation is also discouraged by easy dismissals because, within this institutional framework, enterprises tend to postpone the adoption of labour saving techniques. Thus, productivity is not maximized and, in the long run, this harms the international competitivity of the firms. Finally, in a highly flexible labour market, enterprises have less incentive to train their personnel, since part of the benefits from such investments may accrue to their competitors. This raises the more general question of the kind of development that should be aimed at by the European Union.

In fact, cheap malleable labour can induce capitalists to choose a “low-skills” route to accumulation, a quite viable route to economic success, in which enterprises opt to compete in markets for low value added goods and services, such as textiles, footwear and personal services. “Within the industrialized world, therefore, there remains and even develops further a low-wage sector, where neo-Taylorist and neo-Fordist forms of production continue to flourish, worked by relatively insecure low-paid employees” (Ashton and Green 1996, p. 34). Recent historical experience shows that the UK followed such a route while Germany and Japan took the high-skill route, which is also currently pursued by the newly industrialized economies of the Pacific Rim (Hong Kong, Singapore, Taiwan and South Korea). Of course nothing is permanent: a route to accumulation may appear viable over the medium term, but it does not guarantee that it will remain stable for the indefinite future.26 Then one can ask whether a low-wages/low skills model is really wise for Europe, and conclude instead that economic policy should target the alternative model – the “high-skill” route to accumulation, in which European industries and services be situated at the high-skill, high value-added end of the market.

Finally, we would like to comment on the well-known neoclassical contention that the all-out labour market flexibility is one of the most effective means to combat unemployment. A recent OECD empirical study (OECD 1999, chapter 2) shows that this conventional wisdom is inadequate at best – an outcome that is particularly important, since the organization that produced it is certainly not suspect of radicalism. In fact, after a thorough review of the empirical literature, and relying on new data on employment protection legislation and practices in 27 OECD countries, OECD scholars reach the conclusion that “there appears to be little or no association between employment protection legislation strictness and overall unemployment. However, employment protection legislation may be more strongly associated with the level of employment and the demographic composition of employment and unemployment” (OECD 1999: 47, emphasis added). Of course, the study presents several qualifications of these findings, but the overall conclusion remains.

26 For a theoretical and historical analysis of these aspects see Ashton and Green (1996).

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(e) A new regime for intellectual property rights

1. The transfer of knowledge that is at the root of innovation can take several forms, following the distinction between codified and tacit knowledge. The first type of knowledge covers both public knowledge – i.e. what is fully disclosed in publications – as well as the private knowledge protected by patents, and only partially disclosed. Tacit (or uncodified) knowledge is a typical feature of organisations and it is the main component of the learning process that leads to innovation. However, although tacit knowledge is usually very important, in general it is not the exclusive element for innovation activity, and it is within this context that the question of intellectual property rights can arise.

It is generally accepted that, to stimulate investments in R&D, it is necessary to grant the inventor a reward in the form of a temporary monopoly over the invention (the patent). It is also usually admitted that patents can cover only inventions and not the result of basic research leading to discoveries, as this general knowledge belongs to the common good of mankind.

Patents give rise to two conflicting interests. On the one hand, there is the necessity (or the opportunity) to reward invention by allowing for a monopoly. On the other hand, public interest requires the easy availability of the results of past research in order to make further advances in knowledge and innovation. Public interest is also jeopardised by the well-known monopolistic practice consisting in patenting inventions without exploiting them, the purpose being to exclude competition.

The conflict between private and public interest is particularly relevant in the present situation, as the intellectual property rights regime could either favour the further diffusion of the new technological paradigm or it could delay it. Easier diffusion could be achieved by a system granting a flexible and relatively light protection to the already established interests, while strong protection could lead to opposite result in terms of diffusion. As in all the other fields, the final regulatory setting will result from the outcome of the struggle between groups representing the conflicting interests – a struggle that, among other things, manifests itself into strong pressures on public authorities. In what follows we summarise the current debate, to make apparent what should be the best response of policy makers.

2. Developments in the US since the 1980s fuelled discussions and concerns on both ethical principles as well as economic efficiency. On ethical grounds, the principles at stake concern the legitimacy of– patenting living organisms, micro-organisms, genes and partial gene sequences– privatising elements of common knowledge, such as mathematical algorithms or basic

biological processes and phenomena– private appropriation of the results of publicly funded research.

On purely economic grounds, there is the concern that a system granting too strong protection to private interests is not sustainable in the long run because it hampers innovation. Let me make all this more explicit.

Year 1980 represents a landmark in the broad shift of US policy towards stronger property rights. On the legislative side, the Bayh-Dole act provided blanket permission for performers of federally funded research to file for patents in their own name and to grant licences. In parallel, a Supreme Court Decision (Diamond v. Chakrabarty) enlarged the scope of patentability in the biotechnology industry, to cover objects which were previously excluded from it (Orsi and Coriat 2003). Thus the frontier between “discoveries” (which were not patentable) and “inventions” was displaced, with the results that it is now possible to patent micro organisms, genes and partial gene sequences. The other sector in which the new approach allows for the private appropriation of general scientific knowledge is computer

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software, in which it is now possible to patent algorithms for the simultaneous use of equations.

These developments open up the way to a true commodification of scientific knowledge. Moreover, in numerous cases the patents granted in the US cover not only inventions of recognised utility but also a wide range of future applications. To all this, one should add the fact that US patents are granted for extremely long periods (up to 50 years).

The architecture of the system was completed by legislative and regulatory measures for financial activities that supported the commodification of knowledge. One of the most relevant was the modification of the “prudent man” law on pension funds so as to authorise them to invest part of their capitals in risky securities and stocks, which was previously prohibited (Orsi & Coriat, cit, p.3).

3. This stronger protection of intellectual property rights gave brilliant results in economic terms. U.S. university patenting and licensing grew remarkably after 1980 (Mowery and Ziedonis 2001), the biotechnology and computer industries developed more than in Europe, innovators found capital to finance their projects. For this reason, large industrial groups urge European authorities to go in the same direction as the Americans27, the delicate ethical problems that such an approach would pose notwithstanding.

Nevertheless, even on a purely economic basis, one should ask whether the American way is really a good one in a longer-term perspective. Indeed, several authoritative voices raised concern about the dangers of the American practices, which at the end of the day could block innovation instead of furthering it. Let me quote two of them.

Mowery and Ziedonis (2001) analysed the patenting scores of the US universities before and after the Bayh-Dole act, reaching conclusion that drastically resize the current vaunting view. For instance, they found “little evidence of significant change in the content of U.S. academic research in the wake of Bayh-Dole, and believe that many of the post-1980 changes that have occurred in the relationship between U.S. universities and industry would have occurred without Bayh-Dole” (cit., p. 215). At the University of California and Stanford University invention portfolio shifted before 1980 in favour of biomedical inventions that were highly attractive to commercial licensors and were heavily funded by the federal State throughout the 1960-1980 period. All this means that the new legislation undoubtedly stimulated the patenting activity of universities but, by itself, did not substantially shift the trend of inventions. Mowery and Ziedonis argue that the post 1980 overall positive results are “only the latest chapter in a long history of close ties between U.S. academic and industrial research” (id. p. 214), and suggest “that emulation of Bayh-Dole in other industrial economies with systems of higher education that are very differently structured may be counter-productive or unsuccessful” (id. p. 215).

Nelson (2003) convincingly argues against the privatisation of scientific commons on the grounds that this creates an obstacle to further progress in science and technology. In fact, the findings of basic science are the inputs for further research and, consequently, should have open access. Attempting to shift the help of American policy he offers the following guidelines:

(i) not to grant patents on discoveries that largely are of natural phenomena, and limiting the scope of patents to elements that are artificial28

27 For an analysis of the European situation see Borrás (2003).28 In practice, the identification of what is a substantial transformation from the natural – to be protected by patent – is not always clear-cut. In these cases, Nelson is prone to restrict the coverage of the patent. For instance, in the case of purified natural substances, patents could be limited to the process and not allow the purified product per se to be patented.

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(ii) give a relatively strict interpretation of the meaning of “utility” or usefulness in granting a patent. If, for instance, the direct usefulness is an input or a focus of research, this generic knowledge should be kept open

(iii) narrow the patent scope. In fact, in the US there is a strong tendency among patent applicants to claim protection far wider than they actually achieved, in order to be able to control a wide range of possible substitutes. Public interest requires that these tentative to block potential competition be not allowed

(iv) introduce in the legislation a “research exemption”, viz. use in pure research is not a violation of a patent. As a counterpart for this exemption, universities or other research organisations should not patent anything that comes out of the research in question.29

4. History shows that successful societies are those inspired by a long term vision, that succeed in tempering the demands for short-term profits with the respect of ethical principles. Thus, European society should resist the pressures to imitate the American system of strong protection of property rights, for a double reason. First and foremost for ethical reasons: it is inadmissible that private interests appropriate the results of a publicly funded activity whose intrinsic purpose is the wellbeing of society. The same considerations hold for the private appropriation of the basic knowledge that is necessary for research. Secondly, for economic reasons, as the above discussion of the drawbacks of the American system makes clear that such a system is not the most appropriate for the ongoing fifth long wave.

A reform of the European system of property rights should be inspired by the four principles laid down by Nelson, and indicate clearly what is protected and what cannot be protected.

Concerning university research, we think that the best way to stimulate invention is to provide adequate public funds and leave open the results. The current objective of the Union to increase substantially the financing of research goes in the right direction.

Two further steps seem necessary, that we just mention as their adequate treatment would require another paper. The first is the establishment of the European patent. The second consists of special provisions to combat monopolistic practice, e.g. a regulation stating that if a patent is not exploited, or insufficiently exploited, within a given timeframe, it falls into the public domain. .

III. CONCLUSIONS

1. The first part of this paper was devoted to reviewing some recent contributions to the long-wave theory in order to recall the essential points of a theory that, better than any other, is able to explain the long term development of capitalist economies. By showing the stable mechanisms that produce the historical sequence of long upswings and downswings, long-waves theory provides the tools for understanding the present “knowledge-based society” and offers guidance for economic policy.

2. Considering that the present technological revolution is part of the broad phenomenon of a new long wave (the fifth one in the history of capitalism), it follows that the main focus of economic policy – both macroeconomic and sectoral – should be to support the diffusion of

29 Also Heller and Eisenberg (1998) raise concern about the American approach, as the proliferation of intellectual property rights in biomedical research can seriously hinder progress.

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the new technological style and to favour the institutional changes required by such an objective. This last point is of paramount importance, as the full deployment of a new upswing materialises if and only if technological and institutional changes proceed together.

In real societies, institutional change cannot be dictated from the top. Rather, it is the outcome of social conflicts and struggles. In fact, the institutional set appropriate for a new regime of accumulation requires very deep changes in the organisation of firms, in social relations, in the financial sphere, in regulations as in government action in general; thus, it is no wonder that there is conflict between forces favourable to change and forces opposing it.

Although the final result is unpredictable, this does not mean that public authorities have no particular role to play – the market assuring spontaneously the necessary adjustment. It is just the opposite. Recent developments on financial speculation, growing inequality and persistent unemployment demonstrate the need for public action to correct for these disequilibria. This raises the question of which theory is most suitable to guide economic policy.

During the last decade or so, in most European countries economic policy was oriented by neoclassical theory. The poor results that were obtained should prove the inadequacy of such a theory to direct economic policy towards full employment, social justice and growth. Indeed, putting excessive reliance on market adjustments within an a-historical theoretical framework, the neoclassical theory diverts attention from what is essential, thus impeding reaching the above-mentioned goals. The US experience of the last decades confirms our contention. At the level of official declarations, one certainly has the impression that US economic policy is the emanation of neoclassical theory, but this is not true. In fact, the US macroeconomic policy was fundamentally a mixture of a Keynesian support of private consumption and deficit spending (something that is not necessarily Keynesian!), the whole supported by the special position enjoyed by the US as the issuers of the currency for international transactions.

3. Two main factors seem to delay the deployment of the new long-wave in Europe. The first is the “short-termism” of the majority of the bourgeoisie that, after winning the social conflicts of the 1960s and 1970s, now it wants to win all along the line by imposing conditions on workers that are inimical to full employment and growth. The second is the stifling effect of the implementation of the Maastricht criteria. Now that the euro is a reality, it is time to change the general orientation of the European macroeconomic policy, if we really want to foster employment, growth and the diffusion of the new technological paradigm. For this reason the present paper suggests a Keynesian policy to boost private consumption by revitalising the “golden rule” of linking the evolution of real wages to the increases in labour productivity and, also, to ease the Maastricht criteria by excluding public investment from the 3% deficit target.

4. Another major problem linked with the present phase of the long wave is that we are in an “era of finance”, where financial capital has become so important that it dictates its criteria to enterprises and to the entire economy, thus diverting the focus from capital accumulation in real assets. To re-establish the primacy of productive capital – with financial capital playing its physiological role of facilitator of the accumulation of physical assets – the paper suggests systematic concerted open market operations to regulate liquidity in the financial markets. If successful, these actions would eliminate the excess liquidity in the markets that are at the origin of financial speculations and bubbles. At the same time, such operations would secure stable finance for those fiscal operations that would be necessary to support public investment.

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5. The paper addresses the question of social relations from a double perspective: (i) a new configuration of the employment relationship that, while taking into consideration the requirements of the new technological paradigm, it preserves the essential features of the “European social model”; (ii) the kind of labour market flexibility that favours the diffusion of the ICT technological revolution.

On the first point we relied on the proposals of a recent report sponsored by the European Commission (Supiot 1999). On the second point, we make a distinction between a “labour-controlling flexibility” and a “growth-enhancing flexibility”. The first type of flexibility – that is the kind of all-out market flexibility preached by the neoclassical theory – is a spanner in the works of the diffusion of the new technological style. The second kind of flexibility is instead an essential prerequisite for such diffusion.

6. The paper ends by considering the question of the regime for intellectual property rights that is best suited for the new long-wave. Two points are raised. The first one is a warning not to follow the American practice of allowing private appropriation of elements of common knowledge, or privatise the results of publicly funded research as well as to patent living organisms. These practices should be opposed first of all for ethical reasons and, also, because in the long run they are likely to be counter-productive for promoting innovation. The second point is a plea for a European patent that, among other things, indicates clearly what is protected and what cannot be protected.

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Figure 1. The life cycle of a technological revolution

Source: Perez (2002, p.30)

Figure 2. Recurring phases of each great surge in the core countries

Source: Perez (2002, p. 48)

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Figure 3: The rate of profit - total economy

60

80

100

120

140

160

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

1960

= 1

00

US EU-15

Rate of profit = net operating surplus/net capital stock at current replacement pricesSources: European Commission, European Economy No. 63 1997, p. 28

European Commission, EC Economic Data Pocket Book, several years

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Table 1. Condensed summary of the Kondratiev wavesConstellation of technical and organizational innovations

Examples of highly visible, technically successful, and profitable innovations

‘Carrier’ branch and other leading branches of the economy

Core input and other key inputs

Transport and communication infrastructure

Managerial and organizational changes

Approx. timing of the ‘upswing’ (boom)

‘downswing’ (crisis of adjustment)

(1) (2) (3) (4) (5) (6) (7)1. Water-powered mechanization of industry

Arkwright’s Cromford mill (1771)Henry Cort’s ‘puddling’ process (1784)

Cotton spinningIron productsWater wheelsBleach

IronRaw cottonCoal

CanalsTurnpike roadsSailing ships

Factory systemsEntrepreneursPartnerships

1780s-1815

1815-1848

2. Steam-powered mechanization of industry and transport

Liverpool-Manchester Railway (1831)

Brunel’s ‘Great Western’ Atlantic steamship (1838)

Railways and railway equipmentSteam enginesMachine toolsAlkali industry

Iron Coal

RailwaysTelegraphSteam ships

Joint stock companiesSubcontracting to responsible craft workers

1848-18731873-1895

3. Electrification of industry, transport, and the home

Carnegie’s Bessemer steel rail plant (1875)

Edison’s Pearl St. New York Electric Power Station (1882)

Electrical equipmentHeavy engineeringHeavy chemicalsSteel products

SteelCopperMetal alloys

Steel railwaysSteel shipsTelephone

Specialized professional management systems‘Taylorism’Giant firms

1895-19181918-1940

4. Motorization of transport, civil economy and war

Ford’s Highland Park assembly line (1913)

Burton process for cracking heavy oil

AutomobilesTrucksTractors, tanksDiesel enginesAircraftRefineries

OilGasSynthetic materials

RadioMotorwaysAirportsAirlines

Mass production and consumption‘Fordism’Hierarchies

1941-19731973- [(1992)]*

5. Computerization of entire economy

IBM 1401 and 360 series (1960s)Intel microprocessor (1972)

Computers SoftwareTelecommunication equipmentBiotechnology

‘Chips’ (integrated circuits)

‘Information Highways’ (Internet)

Networks; internal, local and global [(1992)]* -.........

Source: Freeman and Louçã (2001, p.141) * 1992 is added to the original

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